To identify their impact on climate change, companies and organizations must quantify their greenhouse gas (GHG) emissions. While measuring direct emissions (scope 1) and indirect emissions related to energy (scope 2), scope 3 emissions are often the most difficult to calculate, yet they are the most important because they represent the majority of a company's greenhouse gas emissions.
However, for these companies and organizations, indirect emissions very often represent the vast majority of their greenhouse gas emissions.
What are scopes 1, 2 and 3 of carbon emissions?
Scope 1 refers to a company's direct greenhouse gas emissions. The company is directly responsible for these emissions during the production of its products or the provision of its services. This scope includes five sub-categories:
Stationary combustion sources
Mobile combustion sources
Non-energy processes
Direct fugitive emissions
Emissions from biomass (soils and forests)
Scope 2 covers greenhouse gas emissions related to the consumption of electricity, steam, heat, or cooling necessary for the company's operations. For most companies, electricity will be the only source of scope 2 emissions.
Finally, Scope 3 includes all other indirect greenhouse gas emissions. This scope is very broad and covers all emissions related to the company's value chain, both upstream (purchasing, transportation) and downstream (deliveries, product use, end-of-life disposal). Let's take a closer look at scope 3.
What emissions are included in scope 3?
The GHG Protocol defines scope 3 as "all other indirect emissions not included in scope 2." In other words, scope 3 covers all additional greenhouse gas emissions resulting from the company's activities but not directly emitted by the company itself. These emissions can originate from various sources, such as the use of products or services provided by the company, transportation of the company's products, disposal or recycling of the company's products, and any other activities related to the company's value chain.
The GHG Protocol includes a number of categories under scope 3 to help companies identify and account for these emissions:
Purchased goods and services
Capital goods
Fuel and energy-related activities (not included in scope 1 or scope 2)
Upstream transportation and distribution
Waste generated in operations
Business travel
Employee commuting
Upstream leased assets
Downstream transportation and distribution
Processing of sold products
Use of sold products
End-of-life treatment of sold products
Downstream leased assets
Franchises
Investments
The purpose of the 15 categories within scope 3 is to furnish companies with a systematic framework for measuring, managing, and reducing emissions throughout their corporate value chain, both downstream and upstream. These categories are designed to be mutually exclusive, preventing any potential double counting of emissions across different categories within a company.
Why should companies care about scope 3?
There are several reasons why companies should care about their scope 3 emissions:
Competitive Edge: Reducing scope 3 emissions aligns with a company's sustainability goals, enhancing its environmental footprint and carbon efficiency. This not only builds trust among customers, investors, and stakeholders committed to sustainability but also establishes a competitive edge. Identifying ways to cut emissions related to products and services, such as adopting more efficient manufacturing processes or sourcing raw materials sustainably, positions the company ahead in the market by markedly reducing emissions.
Cost savings: Identifying ways to reduce emissions associated with products and services can lead to lower energy consumption and potential cost reduction. For example, adopting more efficient manufacturing processes or sourcing raw materials sustainably can contribute to emission reduction.
Regulatory requirements: Many countries and local jurisdictions have implemented laws focused on reducing greenhouse gas emissions. Companies failing to comply with these regulations may face significant fines and penalties. Actively reducing scope 3 emissions helps companies avoid such consequences and ensures compliance with relevant laws.
Who needs to report scope 3 emissions?
The answer is: every company should report their scope 3 emissions. However, despite a growing number of companies engaging in reporting all indirect emissions, a study conducted by Bloomberg on reported ESG data for 15,000 companies indicates that only around 20% of them disclosed their scope 3 emissions for the 2020 fiscal year.
While there is no single global mandate, several factors are driving its adoption, including mandatory requirements in certain jurisdictions and voluntary initiatives by companies seeking to demonstrate their commitment to climate action.
On the mandatory front, the European Union's Corporate Sustainability Reporting Directive (CSRD) requires companies to disclose scope 1, 2 and 3 emissions. The UK's Streamlined Energy and Carbon Reporting (SECR) framework mandates reporting on a limited subset of scope 3 for large companies. In October 2023, California signed into law the Climate Corporate Data Accountability Act (SB 253), which will require companies with annual revenues exceeding $1 billion and doing business in California to disclose their Scope 1, 2, and 3 emissions starting in 2026
Beyond mandatory requirements, many companies are voluntarily embracing scope 3 reporting to reap its benefits. Investor pressure to consider climate-related risks in investment decisions is a key motivator. By reporting scope 3 emissions, companies can demonstrate their commitment to addressing climate change and managing associated risks, potentially attracting more investors.
Collaborating with suppliers to reduce scope 3 emissions.
Companies must collaborate with their suppliers to reduce scope 3 emissions. Since these emissions are indirect and stem from the company's value chain, it's crucial to partner with suppliers to identify the primary emission sources and explore strategies for reduction.
Enhancing scope 3 measurement with suppliers necessitates a collaborative and transparent approach. For instance:
Establishing clear communication channels: Open communication channels between the company and its suppliers facilitate the sharing of emissions information.
Setting targets: Collaboratively setting emission reduction targets with suppliers aligns efforts and encourages them to measure and report their own emissions.
Monitoring progress: Regularly monitoring progress in emission reduction identifies improvement areas and fosters ongoing collaboration.
Adopting a collaborative and transparent approach enables companies to enhance sustainability practices and reinforce relationships with partners and suppliers.
Illustration of scope 3 significance for a fictional company: "Bestairfood."
Consider the case of a fictional company named Bestairfood, specializing in preparing meal trays for airplanes. In essence, the scope 1 and 2 carbon footprint of Bestairfood encompasses refrigerant gases for food preservation, cooking gas, electricity for premises lighting, and the oil utilized for transporting food to the tarmac.
With an already optimized delivery chain, Bestairfood maintains a relatively low scope 1 and scope 2 carbon footprint. However, the company is highly reliant on fossil fuels, posing potential economic risks in the event of energy scarcity or the introduction of stricter environmental regulations.
Indeed, Bestairfood is entirely dependent on the kerosene consumed by the planes that serve its meal trays. By not considering scope 3, the company is overlooking a significant source of emissions. Additionally, Bestairfood serves beef to passengers, which is a highly emissive red meat due to methane emissions and the deforestation required to feed the animals. This source of emissions would have been accounted for in the "Purchased products and services" sub-category of scope 3.
If the company had decided to measure its scope 3 emissions, it could have identified the main sources of emissions and made informed decisions to significantly reduce its greenhouse gas emissions. For example, the company could have reduced the portion of beef it serves, offered more vegetarian dishes, or replaced beef with duck.
Moreover, by measuring its scope 3 emissions, Bestairfood could have better controlled its economic risks by diversifying its activities and reducing its dependence on the supply of kerosene to the aircraft it operates.
Yes, Scope 3 is crucial for measuring and reducing your company's carbon footprint.
To accurately account for and reduce scope 3 emissions, organizations must have a clear understanding of their supply chain and the emissions associated with their purchased goods and services. This may involve collaborating with suppliers to decrease their emissions and implementing strategies to reduce the organization's overall waste generation. Measuring scope 3 emissions equates to managing the company’s risks. We are transitioning from a simple reporting tool to a strategic necessity that every company must adopt to address climate change.
Kabaun can assist you in building your carbon footprint across Scopes 1, 2 & 3. Contact us to learn more about our services and our platform.